Instruction 15.1: for Following Problem(s), Consider These Debt Strategies Being Considered by Considered

question 52

Multiple Choice

Instruction 15.1:
For following problem(s) , consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%,
to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the
credit annually. The current one-year rate is 5%.
-Refer to Instruction 15.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is (Assume your firm is borrowing money.)

• A) that interest rates might go down or that your credit rating might improve.
• B) that interest rates might go up or that your credit rating might improve.
• C) that interest rates might go up or that your credit rating might get worse.
• D) none of the above.

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Definitions:

Idiosyncratic Beliefs

Personal beliefs or opinions that are unique to an individual, often differing from the common consensus or societal norms.

Autokinetic Effect Studies

Psychological experiments that investigate how people perceive a stationary point of light in a dark room as moving due to the lack of visual references.

Norms

Shared beliefs or rules within a group about how members should behave in a given context, which help to guide and regulate individual behavior and promote group cohesion.

Injunctive Norms

Socially accepted rules or standards that dictate the behaviors that are approved or disapproved of within a society or group.